Even though Brexit has been grabbing the headlines of late there is an economic recovery happening across Europe which was perfectly reflected today when the Czech Central Bank increased banking capital requirements. While the likes of the UK, France, Germany, Spain, Italy and Portugal tend to be the favourites with property investors it looks as though the Czech housing market is doing very well. In a sign of the times the Czech Central Bank is clamping down on potentially dangerous lending before the situation gets any worse.
Highly relaxed mortgage lending standards
The Czech central bank described mortgage lending standards as “highly relaxed” which would appear to have attracted growing demand for mortgages. Mortgage lending in the last year was three times that in 2009 although it has to be said to 2009 was just after the worldwide economic collapse. Nonetheless, this does show the ever increasing demand for property finance across the Czech Republic.
The move by the central bank will see the capital buffer banks hold against domestic lending rise from 0.5% up to 1%. The 0.5% figure has been in force since the start of the year and the increase will come into play on 1 July 2018. In many ways this is a case of the central bank flexing its muscles and showing the markets what it can do if required. No doubt, if lending continued to accelerate at an unacceptable rate, this increase in the capital buffer would be brought forward.
Systemic risks
It was interesting to see that a statement from the Czech central bank suggested that systemic risks to the country’s banking system remained “potential in all areas”. There was particular mention of the mortgage industry and a suggestion that the risk was no longer purely hypothetical and could turn into reality if no action was taken. The potential risk seems to stem from a 15% increase in Czech Republic apartment prices during 2016 with investors encouraged by economic growth and low interest rates.
The fact is that a 15% increase in apartment prices in just one year is not sustainable going forward and if no action is taken by the authorities then the sector could be headed for a fall. Unlike many central banks across Europe, the Czech Republic central bank has made a decision to combat possible problems in the future with changes in the regulatory system today. How refreshing?
Loan to value
It was interesting to see that the current loan to value rate on mortgages stands at 90% which is relatively high especially if markets are so buoyant. A relatively small deposit allows investors to jump onto the bandwagon and hopefully bank a profit in the short term. A suggestion that the residential property market was “moderately overvalued” would appear to be a warning shot across the bows of mortgage lenders. Unless they are more sensible with their ongoing mortgage activity then regulators will be reviewing the sector again in December and taking any necessary action.
If you take a step back and look at the situation from a distance, the 90% loan to value figure does seem to be relatively high. This comes at a time when the Czech economy is doing very well which is filtering down into the property market. However, unless the rate of growth falls it seems inevitable that the Czech Republic central bank will take action sooner rather than later.